This in-depth analysis assesses possible consequences of Brexit for the EU budget and, in particular, the Common Agricultural Policy (CAP).

We discuss how the negotiations about the ‘Brexit bill’ could affect the current and the post-2020 Multiannual Financial Framework (MFF), and CAP spending in particular.

We analyse how Brexit affects the EU budget structurally and how the EU can adjust to the expected budget shortfall.

We offer a quantitative assessment of the impact of Brexit on CAP net balances, including different adjustment scenarios and estimates of their impact on the remaining Member States.

The Brexit bill

Negotiations about the so-called ‘Brexit bill’ or ‘financial settlement’ will determine the extent to which the UK pays its share of the financial obligations jointly undertaken by EU countries while the UK was member of the EU.

At the moment of writing, negotiations on the Brexit financial settlement are in deadlock. The EU has published its position on the matter but the UK has so far refused to detail which obligations it recognises.

The implications of the Brexit bill negotiations for CAP spending depend not only on the overall size of the bill agreed but on the type of financial obligation covered. If the UK accepts to contribute to the EU budget until the end of MFF but does not cover RAL pending in 2020, both EARDF and EAGF spending will be preserved until 2020 but negotiations about the next MFF will be complicated by an unexpectedly large amount of RAL.

The Brexit gap

We estimate that Brexit will leave a permanent shortfall of €10.2 billion per year in the EU budget. This gap has to be filled either through higher national contributions, spending cuts, a combination of both, or the introduction of new Own Resources.

According to our calculations, an increase in contributions disproportionally affects some of the EU’s largest net contributors such as Germany, The Netherlands and Sweden. In part, this is because they currently benefit from a ‘rebate on the rebate’ on their contributions that will no longer apply once the UK leaves. Brexit not only increases the financing burden on the EU-27, it also changes how the burden is shared.

The Brexit gap can also be addressed by reducing spending. It is, however, important to stress that the required savings are substantial compared to many EU programmes. Therefore, large spending categories like CAP are likely to come under pressure if the EU budget is cut.

There is no default method for adapting the current MFF to the departure of a Member State.

Brexit and the CAP

We estimate that the British net contribution in the field of CAP amounts to €3 billion annually. However, spending cuts after Brexit could exceed that sum if other EU programmes are prioritised. We outline how the CAP can be adjusted to Brexit and what the implications for Member States are:

Higher contributions affect today’s biggest net contributors the most. If the current CAP spending levels are maintained after Brexit, Member States’ contributions to the CAP must increase by €3 billion. We estimate that in this scenario, large net recipients like Poland and Greece are almost unaffected. Austria, Germany, The Netherlands and Sweden lose the most in relative and in absolute terms. Generally, net contributors pay for the lion’s share of the shortfall, which increases imbalances in the CAP.

Reducing CAP spending puts a higher burden of adjustment on CAP net recipients. Our estimates suggest that cutting expenditure by a relatively small amount like €3 billion has a mixed effect. Among the largest losers in this scenario are CAP net contributors like Germany and The Netherlands, but also net recipients like Spain and Poland. If CAP expenditure is cut by €10 billion, net contributors gain. At the same time, the losses of net recipients are significant in this scenario, not only in absolute terms, but also compared to government spending in relatively poor countries like Bulgaria.

Conclusions and recommendations

There is no pain-free way of adjusting CAP spending to the Brexit gap. However, the budgetary impact of the different reform options is in most cases limited when compared to general government spending.

The EU should be careful about linking the agreement on the Brexit bill to an agreement on a future and hypothetical transitional period, as proposed by the UK. Moving to the second phase without any clear agreement on the Brexit bill could enable the UK to use money as a bargaining chip when negotiating the future relationship between the EU and the UK.

The EU’s first priority in the Brexit bill negotiations should be to minimise the adverse financial impact of Brexit on the current and future MFF. If concessions are needed, they can come from other elements of the deal such as the UK’s participation in EU bodies and funds, payment for pensions and other employees’ benefits or payment for contingent liabilities.

Bargaining about budget cuts and contribution increases should not be limited to one spending area, but include the entire system of EU finances. For example, net contributors might be more willing to accept further increases in their payments if the overall budget is reformed.

While Brexit can provide the narrative for a profound reform in the architecture of the CAP, aimed not only at reducing overall CAP spending but at rendering CAP more effective and sustainable, a major revision of CAP might not be feasible before 2022 or 2023, with implementation starting in 2024 or 2025.

Figure 10 compares the estimated effect of this measure to the reference scenario. The main losers in this scenario are big EU-15 CAP gross recipients, particularly Spain, France and Germany but also Greece and Ireland. The main beneficiaries are Poland, Romania and the Czech Republic, which see their net balances improve rather than worsen.

Figure 9 shows the estimated impact of a €10 billion spending cut achieved through the introduction of co-financing rates for direct payments. The results are compared to the ‘reference’ scenario where the same cut is distributed between pillar 1 and 2.

If the entire Brexit gap of €10 billion is financed by cutting CAP expenditure, the roles are almost completely reversed compared to the “higher contributions” scenario. Large net contributors to the CAP benefit from the reform.

Reducing spending puts a higher burden of adjustment on net CAP recipients. A €3 billion cut, equivalent to the British CAP net contribution, reduces the Polish and Greek net gains from the CAP by €230 million and €140 million respectively. Some net contributors, like Luxembourg and Belgium, see their CAP net balance improve very slightly, but most are still negatively affected

As figure 6 shows, adjusting to the ‘CAP gap’ through higher contributions leads to a worsening net balance in all Member States. However, not all are equally affected.

As can be noticed, the CAP has a large distributional impact. Since 2014, there has been some variance in CAP net balances but no clear trend towards convergence or divergence.

It is worth noting that pillar 1 spending tends to be more important in Western European countries. Having said this, there are also important exceptions. For example, the EAGF accounts for less than 60% of total CAP spending in Austria and Portugal. This factor is likely to influence Member States’ positions with regards to adjusting the CAP to Brexit.

If we look at the distribution of CAP pillar 1 spending by Member State, we can notice that the biggest beneficiaries are Western European countries (France, Germany Spain, Italy). This is partly explained by historical differences as regards to the level of generosity of direct payments per hectare. As part of the MFF agreement, it was convened that Member States’ differences in direct payments would be gradually reduced between 2015 and 2020 via a process known as ‘external convergence’.

It is important to stress that the required savings would be substantial compared to many EU programmes. Since smaller EU programmes would be devastated by deep cuts, large spending areas such as Structural and Investment Funds and the CAP are likely to come under pressure in this scenario.

If spending in the EU-27 is maintained, revenue needs to increase by approximately €10 billion in order to balance the budget. The GNI-based Own Resource is used to raise the additional funds. As a result, wealthier countries can expect to see a larger deterioration of their net balances. In relation to their current contributions, most Member States are evenly affected. They can expect an increase of between five and eight per cent compared to their current gross national contributions.

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